Appreciating Value Edition six

March 2015 Contents Introduction

Introduction 1

Does the increase in value of NZX listed companies have an impact on private company values? 2

Building quality financial models 6 In this edition of Appreciating Value Our second feature article shares our we reflect on a strong 2014 in terms of 15 Best Practice Financial Modelling deal activity, IPOs and listed share price tips. Given the importance of financial Risk Free Rate revisited 10 performance. Against this backdrop, models in business decision making, it and certainly a surprise compared to is critical that those models are robust Deals update 12 expectations this time last year, we and understandable. Our specialist observe a significant decline in the business modelling team has developed risk-free rate due to a steady decline in these tips through their experience Government bond yields over the last creating and reviewing financial models Cost of Capital and Market Multiples 16 Justin Liddell quarter of 2014 and continuing into throughout New Zealand. Our team’s Partner 2015. credentials are underpinned with team (09) 355 8330 members Alex Gordon and Michael In our first feature article we discuss [email protected] Clarke having achieved first, second the higher trading multiples observed and third placings between them at the from New Zealand listed companies last three ModelOff Financial Modelling and consider what impact this is likely World Championships in New York. to have on private company and SME values. Finally we include our regular Deals update and cost of capital and multiples of listed companies.

We welcome your feedback.

2 PwC Appreciating Value March 2015 1 The average historical EBITDA multiples The theory behind using a market DoesEBITDA Mul tipthele Ranges as aincreaset 31 December 2014 in value of NZX for the trailing 12 months (i.e. the multiple valuation methodology is EBITDA Multiples ratio of enterprise value to the prior that similar firms will typically trade - 5 10 15 20 25 30 35 12 months reported EBITDA) shows a at similar multiples. However, the strong upward trend through 2012 and subjectivity to this approach is driven listedAgric ulcompaniesture & Fishing have an impact relative stability since then at around by; how do you determine how similar 9.5x to 10.0x. a company is? Even within an industry Building Materials & Construction on private company values? Given that most private, small and sector, multiples can vary significantly. medium sized businesses (SME) are For example, as at 31 December 2014, Industrial Products valued on an earnings multiple basis, it companies within the NZX listed is reasonable to assume that generally, Agriculture and Fishing sector were Retail • With the NZX All Gross Index increasing 39% in the past two years, seven values would have increased since 2011. trading in an EBITDA multiple range of 7x to 33x, with a median of 10x. initial public offerings (IPOs) in 2013, and 12 in 2014, the New Zealand It does not, however, follow that using Utilities an EBITDA multiple of 9.5x or 10.0x to In forming a view on the appropriate share market is performing exceptionally well. value a SME is appropriate. multiple, judgement is required around snapshot expectations of future earnings, growth • Whilst some of this strong performance is due to increased earnings, The earnings multiple is a valuation prospects of each respective company there has also been a step change in the observed earnings multiples. methodology that uses the derived and the perceived risks of the company. earnings multiple of a comparable • It is reasonable to assume there would be a similar positive impact on company and applies to it to the subject private company values and our first-hand experience supports this. company’s earnings. These comparable companies are typically sourced from similar entities that are listed on a public stock exchange, or from a publically announced transaction.

Average EBITDA multiple for selected New Zealand companies EBITDA Multiple Ranges as at 31 December 2014

EBITDA Multiples 10.5x - 5 10 15 20 25 30 35

Agriculture & Fishing 10.0x 9.75x Building Materials & Construction 9.5x Industrial Products

9.0x Retail

8.5x 8.5x Utilities

8.0x 8.0x

7.5x Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14

Average EBITDA multiple

NZ Government bond yields Average EBITDA multiple for selected New Zealand companies

7.50 10.5x

7.00 10.0x 6.50 2 PwC 9.75x Appreciating Value March 2015 3 6.00 9.5x 5.50 t n

e 5.00

c 9.0x r e P 4.50 8.5x 4.00 8.5x

3.50 8.0x 8.0x 3.00

2.50 7.5x Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14

Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Average EBITDA multiple

5 year Government bond yield 10 year Government bond yield

NZ Government bond yields Implied 1 year yields interpolated from NZ Government bonds 7.50 5.5% 7.00

5.0% 6.50

6.00 4.5% 5.50

4.0% t n

e 5.00 c r e P d l 3.5% 4.50 e i Y 4.00 3.0% 3.50 2.5% 3.00

2.0% 2.50 0 1 2 3 4 5 6 7 8 9 10 Year

Dec 2011 31 Dec 14 30 Jun 14 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2012 Dec 2013 Dec 2014

5 year Government bond yield 10 year Government bond yield

Rolling Last Twelve Months Deal Activity

200 1,800 Implied 1 year yields interpolated from NZ Government bonds

175 1,575 5.5% ) d ) n a a i l 150 1,350 l a a

r 5.0% e t Z s

u w

125 1,125 A ( e

s N l

( 4.5%

a s e l

a 100 900 D

e f D o

4.0% f r o e

r 75 675 b e m b u d l m 3.5% N e u 50 450 i N Y NZ Australia 25 225 3.0%

- - 2.5%

Dec 09 June 10 Dec 10 June 11 Dec 11 June 12 Dec 12 June 13 Dec 13 June 14 Dec 14 2.0% 0 1 2 3 4 5 6 7 8 9 10 Year

31 Dec 14 30 Jun 14

Australian Last Twelve Month Deal Data Rolling Last Twelve Months Deal Activity

200 1,800 1,600 80% s l

a 175 1,575

1,400 70% e ) D

d l ) n a t a a i l

150 1,350 l o a 1,200 60% a T r e t f Z s o

u e w A s 125 1,125 ( l e g 1,000 50% a s N l t a e (

a n D s e l e f a c 100 900 D o r

e

800 40% f r D o e

P e f

r b a o e

m r 75 675 b s u e

600 30% a m

b N u s l m N a u

e 50 450 N 400 20% D

g NZ Australia n i

n 25 225 200 10% i M - - - 0%

Other Deals Mining Deals Mining Deals % Dec 09 June 10 Dec 10 June 11 Dec 11 June 12 Dec 12 June 13 Dec 13 June 14 Dec 14

Inbound Investment Activity by Country / Region

18 2013 2014 Australian Last Twelve Month Deal Data 16

14 1,600 80% s l a

12 1,400 70% e D

l t a

1,200 60% o 10 T f o

e s l 1,000 50% g a t a 8 e n D e f c o r 800 40% r e 6 P e

b a

m s u

600 30% a

N s 4 l a e

400 20% D

g n

2 i n 200 10% i M - Australia United Asia (excl. United Europe China Canada Other - 0% Kingdom China) States Other Deals Mining Deals Mining Deals % Note: Excludes transactions where the aquiror was not disclosed

Inbound Investment Activity by Country / Region

18 2013 2014 16

14

12

10

8

6

4

2

- Australia United Asia (excl. United Europe China Canada Other Kingdom China) States

Note: Excludes transactions where the aquiror was not disclosed Although a listed company’s trading Although a listed company’s trading 3. Key person risk. This is often seen in Given the most common methodology multiple can give guidance as to an multiple can give guidance as to an smaller private business and reflects in valuing SMEs is an earnings multiples appropriate multiple and therefore the risk to the business if a key approach and a valuer is likely to take appropriate multiple and therefore value of a privately held business in employee (often the founder) were guidance from the implied trading value of a privately held business in a a similar sector, various factors need to leave the business or something multiple as a starting point for the value similar sector, various additional factors to be considered and a number of happen to him or her. Publically of the SME; we consider that movement adjustments may need to be made. listed companies are generally much in listed company values should need to be considered and a number of These can include: less exposed to this risk. generally impact the value of SMEs in adjustments may need to be made. 1. Marketability/Liquidity. A 4. Small company risk. Smaller similar sectors. shareholder in a listed company private companies typically have Recent market sentiment has had a has the advantage of liquidity, less diversified earnings than a listed positive impact on listed entities values. i.e. a shareholder can sell their entity and as such their earnings As such it is reasonable to assume shareholding at minimal cost and are typically more volatile. Any there would be a similar positive in a short time frame. This is not increase in the volatility in the impact on SMEs in that sector. Our generally the case for a shareholder earnings of a business will result in first-hand experience is consistent with of a private company. Marketability a higher required rate of return and the movement in NZX listed trading discounts can be upwards of 30% of consequently a lower value. multiples, i.e. the transactions multiples the total equity value of the business. These factors are just some matters to of SMEs are higher than they were three 2. Control. Observed listed company consider when assessing the earnings years ago. prices are for small, minority multiple to select. To simply take holdings. A control premium should the average of a sector of trading be considered when valuing 100% comparable companies and use that of a business. Depending on the as the earnings multiple to apply to level of control obtained; an investor the subject company is flawed. To may be prepared to pay a significant gain further comfort over the selected premium for control of a business. multiple range, a valuation practitioner will typically include at least one cross check. A common cross check is to compare the implied enterprise value to the total net tangible operating assets. This ratio will be compared to the ratio of listed comparables or transactions (where this information is disclosed).

Nigel Hunter

Director (09) 355 8134 [email protected]

4 PwC Appreciating Value March 2015 5 Building quality financial models PwC’s Modelling Best Practice Top Tips

3. 2. Apply colour, 1. Separate inputs, labelling, Keep it calculations formatting and • Financial models are a key part of business decision making - significant simple and and outputs units in a clear transparent using different value and risk is often dependant on a financial model. and consistent sheets or manner snapshot • PwC has developed a set of 15 best practice tips to apply when building colours models. These are clear, practical tips that anyone building a model, • Break formulae into multiple rows • Show different levels of outputs, • Colour code cell types and of any size, can use. They help reduce risk and avoid your model • There are no prizes for culminating in a single dashboard page worksheet categories becoming someone else’s example of what not to do. complicated formulae • Can easily identify all of the assumptions • Use conditional formatting to dynamically • First impressions of a model are important and key outputs highlight cells of interest and affect people’s perception of quality • Use consistent formatting • Easier to follow the audit trail • Absolute clarity over the inputs improves Financial models are often a key Too often modellers succumb to the In December 2014, the top 16 understanding and increases the integrity of both the data and assumptions part of business decision making. urge to write a fancy formula with 1,000 competitors attended the live finals held Whether used to support a business characters and 12 nested IF statements. at Microsoft’s office in New York City. strategy decision or sitting at the This quickly becomes unhelpful when The finals included three case studies, heart of a crucial acquisition, someone else has to understand it, or the largest of which was a gruelling 2.5 6. significant value and risk is often a change needs to be made a month hour operations and integrated financial 4. Use one 5. dependant on a financial model. later and even the modeller doesn’t statement model for a fictitious South Keep the flow formula per Input data natural – top to row or column, know what they were trying to do. It is American airline. once only and We have all come across painful financial bottom, left to and write them far better to split out the calculations link to it many times models or spreadsheets. Models where New Zealand was extremely well right to be capable of and make your intentions transparent. the logic jumps around everywhere or represented, producing three out of the copying Remember, there is no marginal cost for seems to have been omitted entirely. sixteen finalists. This included PwC’s using extra rows in Excel and no prizes Models that have become so complex Michael Clarke, a returning finalist from for unnecessarily complex formula. • Display assumptions on calculation • Eliminates risk of not updating all • Logic is always in one place, and the same that they are a black-box to even the 2013 whose strong performance earned a pages before referring to them occurrences of an input place, in each row modeller themselves. Models that take 3rd-equal placing. in calculations • Reduces the number of inputs • Prevents errors that arise from copying so long to open that by the time they • Makes the model easier to read over mid-row formulae changes World class This is not PwC New Zealand’s first do you’ve gone back to pen and paper and understand • Makes reviewing/testing and future success in the championship with Alex anyway. modellers • Key outputs should be the primary focus maintenance easier and faster Gordon coming first in 2012 and runner- on the left of the model So how can you make sure it doesn’t The ModelOff Financial Modelling World up in 2013 before accepting an invitation happen to you? PwC has developed Championship was created to give those to join the question design team in 2014. a set of 15 best practice tips to apply that live and breathe modelling a chance “Helping write the questions was a when building models. These are clear, to showcase their skills on a global stage. fantastic opportunity to see the competition 7. 8. practical tips that anyone building a Make column Use repeating 9. from the inside and was quite nice to be model, of any size, can use. They help In 2014, nearly 4,000 competitors headings consistent worksheets Make the one causing the headaches rather than reduce risk and avoid your model from around the world signed up to throughout model, with identical extensive use of experiencing them”, says Alex. and use the same structures and/or error traps and becoming someone else’s example of take part. The first two rounds took place online, with each round testing starting column for repeat calculation cross checks what not to do. To learn more about the championships each time series blocks four case studies over a frantic two and sign-up to compete this year go to Our first tip is also our most important: hour period. The questions covered a modeloff.com keep it simple and transparent. wide range of subjects including debt • Allows for simpler formulas and reduces • Reduces effort and risk of error • Summarise error results on a single sheet calculation, foreign currency translation, referencing errors • Enables ‘punch-through’ consolidations and display overall model status on each The best financial models take a complex model reviews, tournament budgeting, • Multiple narrative columns allow for sheet problem and break it down into simple, modelling best practice and Excel clear labelling • Uses model to help find and immediately logical, easy to follow calculations. knowledge. warn of mistakes • Allows immediate navigation to the source of the issue • Be aware that error checks only trap errors that are expected(e.g. balance sheet not balancing)

6 PwC Appreciating Value March 2015 7 12. Our Best Practice Top Tips can help you improve a model 10. Include 11. Use named ranges to aid explanations, from a build perspective, but planning is perhaps the most Use cell a robust and consistent documentation protection critical part of creating a good model. Liken it to building a design and user instructions house – if the plans are poor, it doesn’t matter how good the builder is, the finished house will suffer. The same applies in

• Increases transparency, especially when • Reduces the chance of accidental change • Include a model structure diagram and building a financial model. the referenced range is not visible • Note that worksheet protection (even with dynamic descriptions of key assumptions/ • Makes formulae more readable, passwords) is weak and can be overridden calculations particularly when referring to another by a determined user • Models should be intuitive to others worksheet or workbook because clarity leads to comfort • Enables others to use and understand the model

13. 14. 15. Add navigation Identify, Treat each tools so label and external link as you can move separate real and an individual around the model nominal costs input cell more easily

• A front page navigation sheet should • Avoids double inflation errors • Apply colour coding be added to enable user to quickly access • Avoids errors in using real and nominal • Avoids long and unreadable formulae key sheets data within calculations • Enables external links to be converted • Add click-able navigation to a model to values without removing other structure diagram model formulae

PwC has a specialist business modelling team that creates and reviews models for clients throughout New Zealand. Our team specialises in planning and building customised, best-practice models that are flexible and fit-for-purpose.

Alex Gordon Brendon Jones

Manager Director (04) 462 7069 (09) 355 8496 [email protected] [email protected]

8 PwC Appreciating Value March 2015 9 EBITDA Multiple Ranges as at 31 December 2014

EBITDA Multiples - 5 10 15 20 25 30 35

Agriculture & Fishing

Building Materials & Construction

Industrial Products

Retail

Utilities

Average EBITDA multiple for selected New Zealand companies

10.5x

10.0x 9.75x

9.5x

9.0x

8.5x 8.5x

EBITDA Multiple Ranges as at 31 December 2014 8.0x 8.0x EBITDA Multiples - 5 10 15 20 25 30 35 7.5x Agriculture & Fishing Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14

Average EBITDA multiple Building Materials & Construction

Industrial Products

Retail

NZ Government bond yields Utilities

7.50

7.00

6.50 The interpolated forward yield Notwithstanding our point estimate Risk Free Rate revisited curve 6.00 on government bonds as at 31 referred to above, it is still important December 5.50 2014 reflects relatively stable to consider the circumstances of t

n expectations of long-term returns of any particular assessment of cost of

e 5.00 c r between 3.5% and 4.25%. capital and the purpose for which e P 4.50 it is being used. For example, the Since December the government bond preferred approach to a discounted • Our current view is that an appropriate point estimate for the long-term curve 4.00 has fallen further. Although cash flow valuation is to assess the current market pricing is lower, these Average EBITDA multiple for sriskelecte dfree New rate Zeala nisd capproximatelyompanies 4.0% 3.50 appropriate discount rate for each movements have been driven by a Kristal Snow snapshot period of cash flow. This may result in combination 3.00 of significant risk events 10.5x a lower discount rate in earlier years Director around 2.50 the world, which in our view are and higher discount rate in later years, (09) 355 8205 not likely to prove sustained over the assuming an upward sloping yield [email protected] 10.0x medium term. Dec 2004 Dec 2005 Dec 2006 Dec 2007 curveDec and 2008 all otherDec 2009 things beingDec 2010 equal. Dec 2011 Dec 2012 Dec 2013 Dec 2014 In previous editions of Appreciating The gap has narrowed over the9.75x last Furthermore, extremely tight supply/ Overall, our view is that an appropriate This is particularly important for very Value, we highlighted the impact on twelve months, with the five and ten demand dynamics within US bond 5 year Government bond yield 10 year Government bond yield 9.5x point estimate of the long-term risk- long-term investments in the current our government bond yields of global year government bond yields now being markets (following previous quantitative free rate at 31 December 2014, based environment (where the appropriate factors such as financial instability in the almost on par. easing programmes), the announcement on longer-dated interpolated yields, is risk-free rate beyond 10 years may be Eurozone, 9.0x quantitative easing in the US, of European Central Bank stimulus The drop in New Zealand government 4.0%. higher than 4%). business and investor confidence and and reduced bond issuance by the New 8.5xbond yields has been due to significant general 8.5x economic conditions in many Zealand Government (due to a narrowing declines in the bond yields of other countries. The five to six year trend of Government deficit) is also helping to Implied 1 year yields interpolated from NZ Government bonds ‘safe haven’ locations (US, Germany, declining Government bond yields turned 8.0x suppress New Zealand government bond 8.0x UK, Japan, Australia) as oil prices have in 2013 though it has begun to fall again yields. 5.5% tumbled and global growth concerns over the last twelve months. 7.5x increase. With New Zealand bond yields trading 5.0% We sawDec a 0 relatively9 constant spacingDec 10 Dec 11 Dec 12 relatively highDec by13 global standards, Dec 14 between five and ten year government strong demand by global investors for a 4.5% Average EBITDA multiple bond yields of around 60 basis points over real return has bid down yields towards the last few years. The expected market historical lows (particularly for longer- 4.0% recovery led to a higher long term yield dated bonds). d on the ten year government bond. l 3.5% e i Y

3.0% NZ Government bond yields 2.5%

7.50 2.0% 7.00 0 1 2 3 4 5 6 7 8 9 10 Year 6.50 31 Dec 14 30 Jun 14 6.00

5.50 t n

e 5.00 c r e P 4.50 Rolling Last Twelve Months Deal Activity

4.00 200 1,800 3.50 175 1,575 3.00 ) d ) n a a i l 2.50 150 1,350 l a a r e t Z s

u w

125 1,125 A ( e

s N l Dec 2004 Dec 2007 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 ( Dec 2005 Dec 2006 Dec 2008 Dec 2009 a s e l

a 100 900 D

e f D 5 year Government bond yield 10 year Government bond yield o

f r o e

r 75 675 b e m b u m N

u 50 450 N NZ Australia 10 PwC Appreciating Value March 2015 11 25 225

Implied 1 year yields interpolated from NZ Government bonds - -

Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 5.5% Dec 09 June 10 June 11 June 12 June 13 June 14

5.0%

4.5%

4.0% d

l 3.5%

e Australian Last Twelve Month Deal Data i Y

3.0% 1,600 80% s 2.5% l a

1,400 70% e D

l

2.0% t a 1,200 60% o T

0 1 2 3 4 5 6 7 8 9 10 f o

e

Year s l 1,000 50% g a t a e n

31 Dec 14 30 Jun 14 D e f c o r 800 40% r e P e

b a

m s u

600 30% a

N s l a e

400 20% D

g n Rolling Last Twelve Months Deal Activity i n 200 10% i M

200 1,800 - 0%

175 1,575 Other Deals Mining Deals Mining Deals % ) d ) n a a i l 150 1,350 l a a r e t Z s

u w

125 1,125 A ( e

s N l (

a

s Inbound Investment Activity by Country / Region e l

a 100 900 D

e f D o

f r o e 18 r 75 675 b e m b

u 2013 2014 m N u 50 450 16 N NZ Australia 25 225 14

- - 12

Dec 09 June 10 Dec 10 June 11 Dec 11 June 12 Dec 12 June 13 Dec 13 June 14 Dec 14 10

8

6

4

Australian Last Twelve Month Deal Data 2

- 1,600 80% Australia United Asia (excl. United Europe China Canada Other

s Kingdom China) States l a

1,400 70% e D

l Note: Excludes transactions where the aquiror was not disclosed t a

1,200 60% o T f o

e s l 1,000 50% g a t a e n D e f c o r 800 40% r e P e

b a

m s u

600 30% a

N s l a e

400 20% D

g n i n 200 10% i M

- 0%

Other Deals Mining Deals Mining Deals %

Inbound Investment Activity by Country / Region

18 2013 2014 16

14

12

10

8

6

4

2

- Australia United Asia (excl. United Europe China Canada Other Kingdom China) States

Note: Excludes transactions where the aquiror was not disclosed EBITDA Multiple Ranges as at 31 December 2014

EBITDA Multiples - 5 10 15 20 25 30 35

Agriculture & Fishing

Building Materials & Construction

Industrial Products

Retail

Utilities

Average EBITDA multiple for selected New Zealand companies

10.5x

10.0x EBITDA Multiple Ranges as at 31 December 2014 9.75x

EBITDA Multiples 9.5x - 5 10 15 20 25 30 35

Agriculture & Fishing 9.0x EBITDA Multiple Ranges as at 31 December 2014 Building Materials & Construction 8.5x EBITDA Multiples 8.5x

Industrial Products - 5 10 15 20 25 30 35 8.0x Agriculture & Fishing 8.0x Retail

Building Materials & Construction 7.5x Utilities Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Industrial Products Average EBITDA multiple

Retail

Utilities

NZ Government bond yields

7.50

7.00

Average EBITDA multiple for selected New Zealand companies 6.50 6.00 10.5x 5.50 t n

e 5.00 c 10.0x r e

Average EBITDA multiple for selected New Zealand companies P 9.75x 4.50

9.5x 4.00 10.5x 3.50

9.0x 10.0x 3.00 9.75x 2.50 8.5x 8.5x 9.5x

8.0x Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 8.0x 9.0x 5 year Government bond yield 10 year Government bond yield

7.5x 8.5x 8.5x Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14

8.0x Average EBITDA multiple 8.0x

Implied 1 year yields interpolated from NZ Government bonds 7.5x Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 5.5% Dec 14

Average EBITDA multiple NZ Government bond yields 5.0%

4.5% 7.50

7.00 4.0%

6.50 d NZ Government bond yields l 3.5% e i 6.00 Y 3.0% 7.50 5.50 t

n 7.00 2.5% e 5.00 c r e

P 6.50 4.50 2.0% 6.00 0 1 2 3 4 5 6 7 8 9 10 4.00 Year 5.50 3.50 31 Dec 14 30 Jun 14 t n

e 5.00 c

r 3.00 e P 4.50 2.50 4.00

3.50Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 RoDeclli n2013g Last TwDece l2014ve Months Deal Activity

3.00 5 year Government bond yield 10 year Government bond yield 200 1,800 2.50 175 1,575 ) d )

Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013n Dec 2014 a a i l 150 1,350 l a a r e t Z s

5 year Government bond yield 10 year Government bond yield u w

125 1,125 A ( e Implied 1 year yields interpolated from NZ Government bonds s N l (

a s e l

a 100 900 D

e 5.5% f D o

f r o e

r 75 675 b e m b

5.0% u m N

u 50 450 Implied 1 year yields interpolated from NZ Government bonds N 4.5% NZ Australia 25 225 5.5% 4.0% - - 5.0% d

l 3.5%

e Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 i June 10 June 11 June 12 June 13 June 14 Y 4.5% 3.0% Activity by deal type Australia remained our largest source Investment from the Asia region 4.0% of inbound deal activity, although deal excluding China increased to nine 2.5% Deals update (inbound/outbound volumes were down 22% on prior year. transactions. This included the Oji & d

l 3.5% Transactions of note included Bluescope INCJ, and Universal Robina transactions

e 2.0% i Y 0 1 2 3 4 5 6 7 8 9 10 /domestic) Steel’s acquisition of Pacific Steel, and referred to above, as well as Swire 3.0% Year Accolade Wines’ acquisition of Mud Group’s acquisition of Pacifica Shipping, • Reported New Zealand deal volumes continued to increase in 2014, up The proportion of inbound deals dropped 31 Dec 14 30 Jun 14 Australian Last Twelve Month Deal Data House Wine Group brands. Australian CK Life Sciences International’s 21% on 2013 volumes2.5% slightly in 2014 to around 31% of private equity firms were also active, acquisition of Mud House Wine total deals (excluding deals where the • Proportion of inbound transactions dropped to around 31% by volume, with Champ Ventures’ investment in TR Group’s vineyards (Accolade Wines snapshot 2.0% acquirer was1,600 undisclosed). However, Group and Archer Capital’s acquisition80% agreed to lease the vineyards as part

0 1 2 3 4 5 6 7 8 9 10 s however this included some of the largest transactions by value l this comprised the largest transactions of Obex Medical. a of their acquisition of the brands) Year 1,400 70% e D

by value, including Oji Holdings and l and Sumitomo Corporation’s 80%

• Continued growthRolling in La sdealt Twel vvolumese Months D edemonstratesal 3A1c Dtievcit 1y4 the strength30 Jun 14 of the NZ Reported inbound investment from thet a Innovation 1,2 0Network0 Corporation of 60% o T investment in Juice Products New

United Kingdom increased significantlyf

economy and a relatively high level of business confidence o Japan’s (INCJ) $1bn acquisition of Carter Zealand (New Zealand’s largest carrot e s

l in 2014, becoming the second highest 200 1,800 1,000 50% g Holt Harvey’sa Pulp, Paper and Packaging t a e processor). The three deals reported n

D country as a source of inbound e

business,f Beijing Capital Group’s $950m c from China included the Beijing Capital o r 175 1,575 800 investment in New Zealand. Notable40% r e P e ) acquisition of Transpacific Industries NZ, transaction noted above. b d a

) transactions included AIM Aviation’s

n m a s a Rolling Last Twelve Months Deal Activity i Universal Robina’s $700m acquisition of u l 150 1,350 l

600 30% a

a Deal activity a N acquisition of Altitude Aerospace 2014 saw strong inbound investment r s e l t

Z NZ Snack Food holdings (owner of the s a

u Interiors from e from the United States, the majority w

125 1,125 A D

( 400 20%

Deal volumes continued their upward trend e

200 1,800 Griffin’s brand), and Canada’s Public g s N l

( and Pressure Technologies’ $25m of which was in the technology sector. n

i a

in 2014, with a total of 178 deals reported s

Sector Pension Investment Board’s $1bn n e l i

a 100 900 D 200 acquisition of Greenlane Biogas.10% This included Microsoft’s acquisition

M e 175 1,575 (based on Thomson data). This is up 21% on f acquisition of AMP Capital Property D o

) f r of Greenbutton, a cloud solutions d o e )

2013 and nearly 50% on 2012 volumes. Deal n Portfolio. These deals highlight the r 75 675 b a a i - 0% l l e 150 1,350 business, and Intel Capital’s investment m a a b r volumes are now broadly in line with that u e attractiveness of New Zealand as an t m N Z s

u in Performance Lab Technologies, a 50 450 u Other Deals Mining Deals Mining Deals %

experienced in 2009 and 2010, as shown in w N 125 1,125 A investment destination for large global ( e ‘smart gadget’ software developer. This s

N NZ Australia l the chart opposite. ( entities. a s e l 25 225 highlights some of the world leading

a 100 900 D

e In contrast, deal activity in Australia has f D o technologies that are being developed

f r o - - e remained relatively flat, with overall deal r 75 675 b here in New Zealand and attracting e m b

volumes down 3% in 2014 and significantly u Inbound Investment Activity by Country / Region

m the attention of global technology N

u 5Dec0 09 June 10 Dec 10 June 11 Dec 11 June 12 Dec 12 June 13 Dec 13 June 14 Dec 14 450 below volumes achieved in 2009 and 2010. N companies. In other sectors, Golden NZ Australia We take a closer look at Australia deal 18 25 225 State Foods acquired Snap Fresh Foods, volumes later in this commentary. 2013 2014 while Discovery Communications Globally, deal volumes were up 10% in 2014 - - 16 acquired the Living Channel NZ. compared to 2013, but down 10% compared 14 to 2009. Dec 09 June 10 Dec 10 June 11 Dec 11 June 12 Dec 12 June 13 Dec 13 June 14 Dec 14

12 Australian Last Twelve Month Deal Data Spotlight on Australia 10 Deal volumes in Australia remained 1,600 80% relatively flat in 2014 and are 32% below 8 s l a

that experienced in 2009. 1,400 70% e

D 6

l

The graph opposite shows that the mining Australian Last Twelve Month Deal Data t a 1,200 60% o T

sector accounts for a significant component f 4 o

e s l of Australian deal volumes. Since 2012, 1,000 50% g a 1,600 80% t a e

n 2 mining sector deal volumes have fallen D e s f l c o r a 800 40% r as commodity demand and prices have 1,400 70% e e P e D

b - l a

weakened. Over the same period non- m t a s

u Australia United Asia (excl. United Europe China Canada Other o 600 30% a

N 1,200 60% T

mining sector volumes have been relatively s l f Kingdom China) States a o

e e

flat, with the mining sector’s proportion of s D

l 400 20%

1,000 50% g a g Note: Excludes transactions where the aquiror was not disclosed t a e n

total deal volumes falling from around 30% i n D n e i f c o

200 10% r M to 20%. This helps explain the fall in deal 800 40% r e P e

b

volumes in 2012 and 2013 in Australia. a

m

- 0% s u

600 30% a

N s l a

Other Deals Mining Deals Mining Deals % e

400 20% D

g n i n 200 10% i M 12 PwC Appreciating Value March 2015 13 - 0% Inbound Investment Activity by Country / Region Other Deals Mining Deals Mining Deals %

18 2013 2014 16 Inbound Investment Activity by Country / Region 14

1 812 2013 2014 1 610

14 8

12 6

10 4

8 2

6 - Australia United Asia (excl. United Europe China Canada Other 4 Kingdom China) States

Note: Excludes transactions where the aquiror was not disclosed 2

- Australia United Asia (excl. United Europe China Canada Other Kingdom China) States

Note: Excludes transactions where the aquiror was not disclosed Sector Analysis 2014 Sectoral Breakdown

35 2013 2014 30

25

20

15

10

5

- High Technology Retail Other Materials Consumer Products and Services Financials Industrials

High technology Industrials Consumer staples Media and Entertainment Media and entertainment Other

Consumer products and servives Consumer Staples

Financials

Materials

Retail

Inbound Investment Activity by Country / Region

18 2013 2014 16

14

12

10

8 Domestic transactions accounted for Local iwi were active during 2014, with New Zealand outbound investment Consumer Staples accounted for 15% of 6 Activity by sector 53% of total announced deals during Ngāi Tahu Holdings and Tainui holdings accounted for 16% of announced deals, 2014 announced deal volumes. Notable Outlook 2014, 4 which was consistent with 2013. acquiring Go Bus. Those two iwi also up from 14% in 2012. New Zealand High Technology, Consumer Staples, deals included the aforementioned The continued growth in deal Notable domestic transactions included acquired Waikato Milking Systems, companies making offshore investments and Financials (as reported by Griffins, Goodman Fielder Meats, and volumes demonstrates the strength Hellers’ 2 acquisition of Goodman alongside Pioneer Capital. Other notable included EBOS, Datacom, Trustpower, Thomson) recorded significant Mud House Wine Group transactions. of the New Zealand economy and Fielder’s Meats division, Veritas private equity transactions included , Vitaco Health, and increased deal volumes compared to Consumer Products and Services relatively high level of business Investment’s - acquisitions of Nosh Maui Capital’s investment in Pedersen . In December 2014, and 2013, as shown in the chart below. accounted for 12% of announced deal Australia United Asia (excl. United Europe China Canada Other confidence that currently exists. Food Market and Better Bar Company, Group, Direct Capital’s investment the New Zealand Superannuation volumes. Included in this sector was a Kingdom China) States High Technology accounted for 17% This is driving not only an increase Livestock Improvement Corporation’s in Energyworks and Pencarrow’s Fund announced a $670m acquisition number of education related deals, with of 2014 deal volumes with 30 deals in domestic transactions but also acquisition of DairyNo tAutomatione: Excludes tran Ltd,sacti ons wherinvestmente the aquiror w ains nARANZot disclos Geoed Ltd, among of RetireAustralia, Australia’s fourth- Academic Colleges Group and Intueri announced as going unconditional interest from offshore investors who and Dorchester’s acquisition of Turners a number of other private equity largest retirement village operator. Education Group driving consolidation during 2014. High Technology see New Zealand as an attractive Group. transactions. in this sector with a total of five transactions included Spark’s investment destination relative to transactions based on Thomson data. acquisition of Appserv, Microsoft’s alternatives, as well as the source acquisition of GreenButton, Silverlake of many leading technologies and New Zealand deal type activity by year HGH’s investment in Finzsoft innovation. These factors, together Solutions, and Datacom’s investment in with supportive debt markets 200 50% SmartWard and Origen Technology. and succession issues faced by many private New Zealand family 180 45% businesses, should continue to drive 160 40% Sector Analysis 201further4 Secto dealral B ractivityeakdow inn 2015. 140 35%

120 30% 35 2013 2014 100 25% 30

80 20% 25 60 15% 20 40 10%

20 5% 15

- 0% 2010 2011 2012 2013 2014 10

Inbound Outbound 5

Domestic Inbound Deals as a % of Total Deals - High Technology Retail Other Materials Consumer Products and Services Financials Industrials

High technology Industrials Consumer staples Media and Entertainment Media and entertainment Other

Consumer products and servives Consumer Staples Domestic transactions accounted for 53% Financials of announced deals with local iwi and Materials Retail private equity active in the market.

Mark Averill Murray Schnuriger Karl Dwight

Partner Partner Partner (09) 355 8682 (09) 355 8461 (09) 355 8707 [email protected] [email protected] [email protected]

Inbound Investment Activity by Country / Region 14 PwC Appreciating Value March 2015 15 18 2013 2014 16

14

12

10

8

6

4

2

- Australia United Asia (excl. United Europe China Canada Other Kingdom China) States

Note: Excludes transactions where the aquiror was not disclosed

New Zealand deal type activity by year

200 50%

180 45%

160 40%

140 35%

120 30%

100 25%

80 20%

60 15%

40 10%

20 5%

- 0% 2010 2011 2012 2013 2014

Inbound Outbound

Domestic Inbound Deals as a % of Total Deals Following are observed Market Cost of Capital Multiples and estimated Cost of Capital as at 31 Decemeber and Market Multiples 2014 for selected New Zealand listed companies.

This supplements our full analysis of the Cost of Capital in New Zealand which can be found on our website pwc.co.nz.

As noted in this publication’s article on the risk-free rate, we have used the long-term risk-free rate interpolated from the yield on New Zealand government bonds.

Where a multiple is negative or greater than 50x we have recorded this as not meaningful (N/M).

Where a company has been listed for less than three years we have included that company’s multiples although have not included the estimated WACC as there is insufficient trading history for calculation of Beta used in the calculation of WACC.

16 PwC Appreciating Value March 2015 17 As at 31 December 2014 As at 31 December 2014 contd. Input assumptions: Market Risk Premium 7.5% Risk Free Rate Of Return 4.0% Marginal Tax Rate On Debt 28.0% Investor Tax Rate On Equity 28.0%

Company EBITDA EBIT NPAT Equity D / WACC Company EBITDA EBIT NPAT Equity D / WACC Multiple Multiple Multiple Beta (D+E) Multiple Multiple Multiple Beta (D+E) Ratio Ratio Agriculture & Fishing Industrial Products A2 Corporation Limited NM NM NM 1.1 0% 11.1% Mercer Group Limited NM NM NM 0.9 10% 9.1% Fonterra Shareholders' Fund 33.5 33.5 NM NM 0% NM Methven Limited 9.7 13.0 17.1 0.5 22% 6.4% PGG Wrightson Limited 7.2 7.9 8.2 1.4 22% 11.8% Scott Technology Limited 13.8 17.8 26.7 0.9 18% 8.8% Sanford Limited 10.6 15.2 20.0 0.6 29% 6.4% Skellerup Holdings Limited 4.9 5.6 6.7 0.6 0% 7.6% Seeka Kiwifruit Industries Limited 7.0 13.1 14.2 0.8 40% 7.4% Sealegs Corporation Limited NM NM NM 0.8 0% 8.5% Synlait Milk Limited 14.1 18.6 23.9 NM 25% NM Drive Technologies Limited NM NM NM 0.7 32% 7.2% Turners & Growers Limited 10.3 16.3 22.9 0.6 41% 6.2% 7.7% 8.6% Information Technology Building Materials & Construction Diligent Board Member Services INC 23.5 28.1 45.6 0.8 0% 9.0% Limited 9.6 12.9 16.8 1.3 24% 10.6% Rakon Limited NM NM NM 1.7 20% 13.6% Nuplex Industries Limited 7.4 10.5 11.3 1.4 34% 10.4% SLI Systems Limited NM NM NM NM 0% NM Steel & Tube Holdings Limited 9.7 11.9 14.2 1.3 20% 11.0% Smartpay Limited 7.9 14.5 14.6 1.4 44% 9.8% Tenon Limited 13.7 21.6 NM 0.6 33% 6.4% Group Limited 13.5 13.9 18.1 1.2 10% 11.4% 10.5% Wynyard Group Limited NM NM NM NM 0% NM Consumer Xero Limited NM NM NM 1.5 0% 14.4% Cavalier Corporation Limited 6.2 9.5 7.2 1.2 59% 8.0% 12.6% Comvita Limited 15.6 21.3 26.9 0.5 32% 6.1% Investment Delegat Group Limited 7.8 9.2 10.9 0.8 25% 7.9% Barramundi Limited NM NM NM 0.8 0% 8.8% Energy Mad Limited NM NM NM NM 34% NM Hellaby Holdings Limited 13.9 24.4 NM 0.7 18% 7.6% Moa Group Ltd NM NM NM NM 0% NM Infratil Limited 6.3 7.9 4.6 0.8 51% 6.4% Promisia Integrative Limited NM NM NM 0.4 13% 5.9% Kingfish Limited 10.7 10.7 10.7 0.6 0% 7.3% SeaDragon Limited NM NM NM NM 0% NM Marlin Global Limited 7.8 7.8 8.1 0.7 0% 8.2% Trilogy International Limited 13.8 15.6 19.3 0.4 10% 5.7% Rubicon Limited 29.9 NM NM 0.5 25% 6.3% 7.4% Veritas Investments Limited 9.8 9.8 12.7 NM 5% NM Financial 6.6% Heartland New Zealand Limited NM NM 14.6 2.0 83% 6.9% Leisure & Tourism NZX Limited 16.1 17.0 23.7 0.8 1% 8.8% Millennium & Copthorne Hotels New Zealand Limited 6.3 7.4 5.6 0.4 18% 5.8% Pyne Gould Corporation Limited 3.2 3.3 3.3 0.7 0% 8.1% SKYCITY Entertainment Group Limited 11.7 16.7 22.9 1.0 24% 9.1% Tower Limited 10.0 10.5 16.3 0.7 0% 7.9% Tourism Holdings Limited 4.7 12.0 18.2 1.2 29% 10.0% 7.2% 8.9% Health & Aged Care Media & Telecommunications Abano Healthcare Group Limited 9.3 14.8 26.4 0.8 38% 7.6% 5.1 9.3 7.1 1.4 65% 7.2% BLIS Technologies Limited NM NM NM 0.6 0% 7.1% Network Television Limited 7.7 11.0 14.2 0.9 14% 9.0% Ebos Group Limited 10.7 12.1 16.0 0.7 22% 7.4% Limited 7.1 10.4 12.5 1.3 11% 11.6% Fisher & Paykel Healthcare Corporation Limited 20.3 24.3 34.4 0.8 3% 8.4% TeamTalk Limited 30.5 NM NM 0.6 42% 6.4% Limited 13.0 13.2 14.4 1.1 4% 10.8% 9.9% Pacific Edge Limited NM NM NM 2.4 0% 21.0% Limited 19.0 19.8 18.9 1.0 8% 10.0% Summerset Group Holdings Limited 27.3 28.8 15.6 1.4 49% 9.3% 9.4%

18 PwC Appreciating Value March 2015 19 As at 31 December 2014 contd. As at 31 December 2014 contd.

Company EBITDA EBIT NPAT Equity D / WACC Company EBITDA EBIT NPAT Equity D / WACC Multiple Multiple Multiple Beta (D+E) Multiple Multiple Multiple Beta (D+E) Ratio Ratio Mining Services New Talisman Gold Mines Limited NM NM NM 0.8 0% 8.6% AWF Group Limited 8.5 10.8 13.2 0.5 32% 6.2% New Zealand Oil and Gas Limited 3.7 20.0 26.3 1.0 0% 10.2% Opus International Consultants Limited 6.8 8.3 9.2 0.7 27% 7.0% 10.2% 6.8% Ports Transport Air New Zealand Limited 5.8 12.4 10.6 1.4 39% 9.5% Auckland International Airport Limited 16.1 18.9 23.3 0.9 23% 8.0% Freightways Limited 13.0 15.2 21.5 0.9 16% 9.1% Marsden Maritime Holdings Limited 13.2 13.3 13.4 0.7 0% 8.1% Limited 12.6 15.3 19.5 0.5 15% 6.0% Limited 18.2 21.4 29.3 0.6 10% 6.9% 8.5% South Port New Zealand Limited 9.3 11.7 15.5 0.4 9% 5.7% 7.7% Utilities Property Limited 10.1 14.4 20.0 0.7 22% 7.3% Argosy Property Limited 10.2 10.2 9.3 0.6 36% 6.4% 11.3 23.7 44.1 NM 31% NM Augusta Capital Limited 16.7 16.8 22.2 0.6 38% 6.3% Horizon Energy Distribution Limited 8.3 13.3 16.8 0.5 34% 6.2% CDL Investments New Zealand Limited 7.2 7.2 9.4 0.5 0% 6.9% Limited 9.9 15.2 19.6 NM 20% NM DNZ Property Fund Limited 12.0 12.0 11.6 0.6 34% 6.2% Mighty River Power Limited 10.0 14.0 19.4 NM 23% NM Goodman Property Trust 13.4 13.4 10.9 0.6 37% 5.8% NZ Windfarms Limited 12.0 NM NM 0.6 42% 6.6% Limited 21.3 21.3 22.4 0.7 37% 6.4% The New Zealand Refining Company Limited 21.5 NM NM 1.3 29% 10.3% NPT Limited 15.1 15.3 17.5 0.5 29% 6.1% TrustPower Limited 13.9 16.4 19.4 0.5 35% 5.9% Precinct Properties New Zealand Limited 12.0 12.0 10.8 0.5 32% 6.1% 9.3 13.1 16.5 0.7 47% 6.0% Property for Industry Limited 12.7 12.7 14.5 0.5 33% 6.0% Vital Healthcare Property Trust 13.0 13.0 15.2 0.5 30% 6.0% Limited 14.3 19.5 30.4 NM 19% NM 6.1% 6.7% Retail Market Weighted Average 8.4% Briscoe Group Limited 11.7 12.8 17.3 0.7 0% 7.8% The Colonial Motor Company Limited 7.1 7.9 10.0 0.9 22% 8.4% Green Cross Health Limited 10.0 11.3 19.1 0.5 4% 6.4% Hallenstein Glasson Holdings Limited 6.9 9.6 13.0 0.8 0% 9.1% Holdings Limited 6.9 7.8 10.3 1.7 13% 14.0% Kirkcaldie & Stains Limited NM NM NM 0.8 58% 6.9% Michael Hill International Limited 9.3 12.1 16.6 0.9 12% 8.9% Mowbray Collectables Limited NM NM NM NM 26% NM Pumpkin Patch Limited NM NM NM 1.6 64% 8.9% New Zealand Limited 8.0 11.9 16.5 0.8 2% 8.5% Smiths City Group Limited 11.7 13.1 4.4 1.4 74% 7.3% Limited 7.8 11.2 13.8 1.2 19% 10.7% 9.6%

Disclaimer: The Cost of Capital and Market Multiples is intended as an overview of WACC and Market Multiples as at 31 December 2014. Readers are advised that before acting on any matter arising in this report, they should consult PricewaterhouseCoopers Corporate Finance.

20 PwC Appreciating Value March 2015 21 How we can help

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Auckland Wellington Christchurch Justin Liddell Bruce Wattie Craig Armitage Partner Partner Partner (09) 355 8330 (04) 462 7452 (03) 374 3052 [email protected] [email protected] [email protected]

Eric Lucas Richard Longman Wayne Munn Partner Partner Partner (09) 355 8647 (04) 462 7482 (03) 374 3054 [email protected] [email protected] [email protected]

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Kristal Snow Director (09) 355 8205 [email protected]

Nigel Hunter Director (09) 355 8134 [email protected]

Regan Hoult Director (09) 355 8177 [email protected] pwc.co.nz/deals/valuation-strategy

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